China’s Stocks Drop to Lowest Since March 2009; Smallcaps Tumble

Jan. 5 (Bloomberg) -- China’s stocks fell to the lowest
level since March 2009 on concern the European debt crisis will
curb exports and a potential cash crunch before the Chinese new
year holidays may boost lending costs for small companies.

Shippers Decline

Speculation the securities regulators are “looking to
decentralize oversight on financing plans may have had a
psychological impact on investors,” said Wu. “If the Shenzhen
exchange were to be in charge of refinancing for GEM-listed
stocks, there would be less certainty.”

China Cosco lost 4.4 percent to 4.30 yuan. UniCredit SpA,
Italy’s largest bank, said yesterday it will sell new shares in
a 7.5 billion-euro ($9.8 billion) offer to strengthen its
capital position. The rights offer boosted concern that lenders
may struggle to raise more capital to weather the region’s debt
crisis. The European Central Bank reported overnight deposits
from financial institutions rose to an all-time high.

The Shanghai Composite fell 1.4 percent on the first
trading day of the year yesterday, adding to a 22 percent plunge
last year, on concern increases in borrowing costs and Europe’s
debt crisis will derail economic growth. The CSI 300 slid 25
percent in 2011. The value of stocks traded in Shanghai slumped
to the weakest level in three years on Dec. 29.

Money Rates

The People’s Bank of China refrained from selling three-month bills for a second week today, helping stem increases in
money-market rates as banks hoard cash in the run-up to the
Chinese New Year holiday.

China’s seven-day repurchase rate, which measures interbank
funding availability, rose 51 basis points to 4.51 percent in
Shanghai, based on a daily fixing by the National Interbank
Funding Center. It reached a five-month high of 5.60 percent on
Dec. 30 before sliding 1.60 percentage points yesterday after
Premier Wen Jiabao said business conditions may be “relatively
difficult” this quarter and monetary policy will be fine-tuned
as needed.

Staples Drop

Consumer-staples producers in the CSI 300 slid for a second
day, losing 1.6 percent. The stocks were the best performer last
year out of the index’s 10 groups as investors bought shares of
companies whose earnings can better withstand an economic
slowdown. The gauge of consumer staples trades at 16.8 times
estimated earnings, compared with 8.9 times for the CSI 300,
according to data compiled by Bloomberg.

“Chinese alcohol companies, one of the biggest winners
last year, have relatively high valuations now,” said Zhang Lu,
a Shanghai-based analyst at Capital Securities Corp. “Investors
are taking profits.”

A gauge of financial companies in the CSI 300 rose 0.6
percent today, the only gainer among the industry groups.

Economists at Barclays Capital and Bank of America Corp.
say the central bank will cut lenders’ reserve requirements
before the Chinese New Year holiday starts on Jan. 23, the
second reduction since 2008. The People’s Bank of China raised
reserve requirements six times last year to cool inflation that
accelerated to its fastest pace in three years in July.

“I think investors will gain more confidence in the
interest-sensitive sector” if borrowing costs and reserve
ratios are cut, while liquidity improves, Hugh Simon, chief
executive officer of Hamon Investment Group, said on Bloomberg
Television today from Hong Kong. He said he was buying Chinese
bank shares.

Local Debt

Concerns over the quality of Chinese banks’ assets, the
“major share-price driver” of lenders’ stocks last year, will
ease, according to Macquarie Group Ltd.

“We believe the macro economy will undergo a soft landing
and there will be further monetary loosening in 2012,” Victor
Wang and Rachel Li, Hong Kong-based analysts at Macquarie, wrote
in a report dated yesterday. “We thus expect asset quality
concerns to ease going forward.”

China’s audit office said local governments have cleared up
almost half the 531 billion yuan ($84 billion) of debt on their
books that an investigation found to have irregularities. The
governments and companies they set up to borrow money have
resolved 259 billion yuan of bad debt with measures including
land sales and the offer of new collateral, according to data
released yesterday on the National Audit Office’s website.